The year 2016 looks like being a battle between greed and fear with regards to Australian dollar corporate bonds’ performance. Greed will be driven by investors increasingly frustrated by falling deposit yields. Fear looks most likely to come from abroad, namely, prevailing low commodity prices causing rising defaults in the U.S and problems from emerging markets. The good news is that A$ credit spreads already capture some of this external fear. At the same time, the chance of widespread A$ bond defaults appears low. Investors in well-managed credit funds are set to get healthy returns for the default risk taken. The earnings, though, may be hard earned. Contagion from outside Australia could make for a bumpy, albeit ultimately rewarding, ride this calendar year.
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